Impact in the South

The existence of debt has both social and financial costs. Heavily indebted poor countries have higher rates of infant mortality, disease, illiteracy, and malnutrition than other countries in the developing world, according to the UN Development Program (UNDP). Six out of seven heavily indebted poor countries in Africa pay more in debt service (i.e., interest) than the total amount of money needed to achieve major progress against malnutrition, preventable disease, illiteracy, and child mortality before the year 2000. If governments invested in human development rather than debt repayments, an estimated three million children would live beyond their fifth birthday and a million cases of malnutrition would be avoided⁴. The UNDP estimates that sub-Saharan African governments transfer to Northern creditors four times what they spend on the health of their people. (Human Development Report, 1997)

On the financial side, heavy indebtedness is a signal to the world financial community that the country is an investment risk, that it is unwilling or unable to pay its debt. As a result, impoverished countries are either cut off from the international financial markets or pay more for credit. The UNDP estimates that in the 1980s, the interest rates for poor countries were four times higher than for the rich countries due to inferior credit ratings and the expectation of national currency depreciations. Another cost of debt is the absence of infrastructure such as roads, schools, or health facilities that could both fight poverty and create the conditions for more economic growth. A different type of cost is associated with the time civil servants spend negotiating debt repayments. Oxfam International estimates there have been over 8,000 debt negotiations for Africa since 1980.

Heavily indebted countries face enormous pressure to generate foreign exchange in order to pay their debt service and purchase essential imports. The international financial institutions often offer financial assistance to countries in this situation and use their leverage to compel the countries to accept structural adjustment and stabilization policies. These structural adjustment policies (SAPs) and the austerity measures associated with them can have a strongly negative impact on the poor, both initially and for extended periods.

SAPs are designed to: I) Stabilize faltering economies by reducing inflation and correcting the balance of payments; and, 2) Increase growth by making economies more productive and efficient and by opening them to market forces. Major elements in structural adjustment programs typically include:

· Raising taxes to increase government revenue and balance the budget
· Eliminating price and interest rate controls
· Reducing the size and scope of government and privatizing state-owned enterprises
· Reducing tariffs and other restrictions on foreign trade
· Reducing regulations on businesses and on capital flows to encourage local and foreign investment.

Although SAPs may help a country become more competitive in the global arena, they can severely harm the poor. This happens when:

· Social expenditures (especially for health, education, and welfare) are cut back in order to meet targets for reducing fiscal deficits

· Public sector employees are dismissed in government down-sizings without retraining or other economic opportunities

· Local companies close in the face of competition from abroad

· New investment is slow and does not create jobs at the rate expected

SAPs can also create an environment which values global competition above all else, resulting in lower wages and worsening labor conditions for workers. Deregulation of labor markets can result in situations where workers cannot exercise their rights and local entrepreneurs and multinational corporations maximize their profits by operating sweatshops. Women and children, the majority of sweatshop workers, are hurt the most by starvation wages, long hours, and unsafe or unsanitary conditions.

SAPs are based on economic theories considered universally applicable and thus are often applied uniformly. Yet, the specifics of the timing and sequencing of SAPs may not adequately take into account a country's political and institutional culture or its ability to absorb the adjustments. Governments are then forced to decide which public sectors to cut and which to save. Unfortunately the poor and the vulnerable are the ones least able to protect themselves in this process.

Debt and structural adjustment policies can harm the environment. When countries need to generate more foreign exchange to service their debt, they increase exports. But because many developing countries depend on exports such as logging, mining, or a single agricultural crop, there is a serious risk that they will exploit these resources in a way that will cause major damage to the environment. Unless effective programs of environmental protection are put in place, export orientation can have a devastating impact on the land and its people.